As a form of investment, buying rental property is generally considered to be a very good one. However, real estate investing requires due diligence to ensure you get the best ROI. If you’re reading this, you’ve probably been searching for tips for buying a rental property to make sure you’re doing things the right way from the start. If so, then you’re in the right place! Here are 40 tips we’ve gathered from experts in the industry that will help you find and buy the perfect rental property for you.
1- Make Sure You’re Landlord Material
Buying rental property is a challenge in itself, but being a landlord is actually the hardest part. Just because rental properties are considered passive investments, that doesn’t mean you’re fully passive in managing them. If you’re planning to get into real estate investing, then you need to have the time and skills to put into managing your investment property. Do you know your way around a toolbox? How are you at repairing drywall or unclogging a toilet? Sure, you can hire someone to do it for you, but (when it comes to the small stuff) that isn’t recommended for new real estate investors as it’ll eat into your profits. Becoming a landlord also involves managing tenants, making connections, managing costs, paying your dues, etc. One tip is to consider renting out your own home first to test your landlord abilities.
2- Have a Long-Term Investing Plan
If you’re looking to make money in real estate, then you need to think long-term. Identify your end goal and write a real estate business plan before buying your first rental property. Keep in mind that your end goals should be based on realistic expectations and your financial capabilities. Ask yourself:
- How much money do I plan to invest in rental properties?
- How many rentals do I plan to own?
- When do I plan to retire and how much money will I need to cover my expenses?
These types of questions will help you lay the benchmarks you need to focus on your end goal rather than any minor setback when buying a rental property.
3- Pay Down Any Debt First
Some might say it’s ok for savvy real estate investors to carry debt as part of their investment portfolio. But as a beginner investor, it’s best to avoid that. So if you have student loans, unpaid medical bills or any kind of balance on your credit card, then you should postpone investing in real estate for a while. Paying down your debt in this situation should be your priority before buying rental property. You don’t want to put yourself in a position where you lack the cash to make payments on your debt. Being cautious is key.
4- Use Leverage for Buying Rental Property
Some argue that buying rental property with cash offers more benefits, but experts beg to differ. Leverage means borrowing money to help finance an income-producing asset. The most common form of leverage in real estate is taking out a mortgage. Using leverage to buy an investment property gives you the advantage of starting a real estate business with little money. Moreover, it allows you to buy a larger asset that has a better potential ROI than you could if you were buying rental property with 100% of the purchase price in cash. As you can see, leverage allows you to use other people’s money to make money!
5- Save for the Down Payment
If you’ve been doing your research on investing in real estate, you should know by now that the 3% down payment you may have put down on your primary residence isn’t going to work for a rental property. The typical down payment for investment properties is much larger than that – you’ll need at least 20-25% of the property’s purchase price. While some lenders might accept lower down payments, others won’t. So, anyone thinking of becoming a landlord or property investor should always come prepared and have the down payment ready. This will also ensure you get qualified for a rental property mortgage.
6- Weigh Your Financing Options Carefully
If you’re going to use leverage as experts recommend, then one of the things to consider when buying rental property is your financing options. When you go to the bank to apply for a mortgage loan, you’ll find plenty of options available for financing your first investment property. Should you choose a 15-or 30-year mortgage? A fixed or adjustable rate? Of course, different options come with different benefits and costs. Therefore, it’s important that you weigh all your financing options carefully to make sure you choose the right loan option that best suits your financial standing and real estate investment goals.
7- Get Pre-Qualified for a Mortgage Loan
One mistake that first-time real estate investors make is making offers on rental properties before actually securing financing. Instead, the right thing to do is get pre-qualified before you even start your rental property search. Pre-qualification helps you better understand what types of investment properties you can afford to buy. Furthermore, including a pre-qualification letter in your purchase offer shows the seller that you are a serious buyer and increases your chances of closing the real estate deal faster. Make sure to understand and meet the requirements for pre-qualification like having a good credit score, a low debt-to-income ratio, cash for the down payment, etc.
8- Calculate Operating Expenses
While every rental property is different, all have one thing in common: expenses. As a landlord, you should know how to estimate the expenses you’ll need to cover to keep the investment property running. Some of the most important operating expenses associated with rental properties include:
- Maintenance costs
- Possible homeowners’ association fees
- Property taxes
- Monthly expenses like pest control and landscaping
One of the easiest ways for a first-time landlord to calculate operating expenses is using the 50% rule. For example, if you make $2,000 per month from rent, expect to pay 50% ($1,000) in total expenses.
9- Budget for the Unexpected
When considering your expenses before buying your first rental property, it’s also important that you know all about and budget for the unexpected expenses that come with owning a rental property. These include taxes, vacancies, and damages done by bad tenants. Moreover, it’s no secret that even the strongest real estate market can dip. So, the next tip for buying rental property from experts is to always set aside money for unexpected repairs. Experts also advise having at least six months in cash reserves saved for emergencies.
10- Open a Separate Business Account
If you put personal money into a business, including a rental property business, then you can be exposed to some potential risks down the road. For example, combining your finances can lead to some accounting as well as tax issues. Plus, it becomes much harder to keep track of income and expenses. Therefore, it’s best for a landlord to stay on the safe side and to keep your personal and business finances separate by having separate accounts. And if you’re planning to buy multiple rental properties and grow your business, remember to open separate accounts for each rental you own.
11- Understand Real Estate Taxes
Tax deductions are one of the many benefits of buying rental property. If you own an investment property, you’re able to write off nearly every expense related to your real estate business, including the mortgage interest, utility payments, maintenance, etc. Saving double digits on taxes while building equity at the same time allows you to automatically build more in profit from your first rental property. So if you’re not aware of the tax deductions available to you as a real estate investor, get expert advice by talking to a certified public accountant about how to maximize tax deductions.
12- Consider Out-of-State Real Estate Investing
Always remember the golden rule in real estate investing: location, location, location. While first-time real estate investors prefer to buy close to home, this is not always a good tip. Experts recommend searching for rental properties in other parts of the country. That’s because your local housing market might not be a good investment location. Plus, you might be able to find a more profitable property that offers a much better ROI in another market. Why limit yourself to one area when you can find investment opportunities anywhere in the US housing market?
Use Mashvisor to find and analyze your first rental property in the city of your choice in a matter of minutes.
13- Invest in Locations with High ROI
As you already know by now, owning a successful rental property business is all about finding great real estate deals in locations with high rental demand. You also want to buy in cities with high cap rates as these are considered the best places to invest in real estate. Other indicators of good investment locations for buying rental property are population growth, job growth, and low unemployment rate. Find a city with these characteristics and you’ve found yourself the best rental market where you can invest for a high ROI.
Make sure to check our list of the 10 Best Places to Invest in Real Estate in 2020.
14- Study the Housing Market Trends
This tip is important regardless of where you decide to invest in real estate, but especially if you’re buying rental property out of state. Real estate market trends such as property prices, rental rates, home sales, interest rates, and others can all tell you where the market is heading. For example, if home prices are going up while home sales are slowing down, this means homebuyers are not putting any offers on homes for sale. In turn, this is a good indicator that the rental demand is strong! Real estate investors will have a better chance of scoring a good investment rental property and charging higher rents.
For some extra tips on how to go about buying a rental property, check out our video below:
15- Research the Neighborhood You’re Buying In
When we’re talking about location in real estate investing, we’re not just talking on the city level, but on the neighborhood level as well. The best neighborhood to buy your first rental property is the one where your property will have a high chance of being occupied – i.e. where there are good tenants. For example, it’s hard to find and keep a good tenant in a bad area where crime rates are high. Besides low crime rates, other factors that’ll help you identify good neighborhoods for buying an income property are proximity to public transit, low property taxes, a decent school district, a growing job market, and lots of amenities like parks, malls, restaurants, and movie theaters.
16- Know What Makes for a Good Rental Property
Not every house for sale out there makes for a good rental. As a first-time landlord, you need to set your criteria so you don’t waste your time looking at properties that will never produce good rental income or a return on investment. This means you need to know how to quickly run a rental property analysis and how to calculate ROI metrics like the cap rate, cash on cash return, gross rent multiplier, and cash flow. Calculating these numbers can help you assess a potential investment opportunity and narrow down your property search before making a buying decision to ensure you’re buying rental property that will actually make you money.
Do you have a free Mashvisor account? Use our Property Finder to find lucrative investment properties that match your criteria in a matter of minutes!
17- Buy Single-Family Homes First
Experts recommend that beginner real estate investors start their investing career with single-family homes. These rentals are always in demand and are easier to manage than multi-family or commercial properties. Plus, with only one tenant, there tends to be less wear and tear. Being a landlord to a single-family home rental is a great way to get into real estate investing and gain experience before growing and diversifying your portfolio.
18- Buy a Multi-Family Home to Hack
If you’re interested in getting started with a multi-family investment property, the best way to do that is by buying a multi-family home that you can live in. For example, you can buy a 2-unit (duplex) or 3-unit (triplex) property, live in one unit, and rent out the rest. Real estate investors call this strategy “house hacking.” It’s a good way to enter the property investing business while living mortgage- and rent-free. To learn more about this, read The Ultimate Guide to House Hacking.
19- Buy Below Market Value
Successful real estate investors know that the best investment properties are priced below market value. The reason is simple – the more expensive the home, the higher your operating costs will be. In addition, if you find a bargain now, it’ll help you withstand fluctuations in property value over time. That way, you can profit when you eventually sell the property. Some real estate experts advise starting with a $150,000 home for those who plan on buying rental property with cash.
20- Buy Rent-Ready Property
Many find it tempting to find cheap homes for sale and flip them into a rental property. While that could be a good way to make money in real estate, it’s not a good idea for beginners. Fixer-uppers carry risks and you’re likely to pay too much in renovations. Don’t make things complicated as you’re just getting started. Instead, consider buying rental property that’s more or less rent-ready and allows you to make cash flow from the start.
21- Invest in Turnkey Real Estate
Turnkey real estate is property that comes with existing tenants and property managers. If the idea of screening and dealing with tenants or managing rentals fills you with stress, this is a great thing to consider before buying a rental property. Investing in turnkey properties means immediate rental income and a manager to deal with those 2 a.m. phone calls instead of you. This is one of the easiest ways to start making money in real estate from the get-go!
22- Only Buy Positive Cash Flow Properties
There are two ways to make money from investment properties: cash flow and appreciation. For beginner investors, it’s best to focus on the first. Meaning, whatever type of income property you decide to buy, it has to be a positive cash flow investment. Don’t rely on appreciation because homes don’t always go up in value. If the rental property generates positive cash flow, on the other hand, any fluctuations in the real estate market will be less relevant. You can hold your investment for a longer time and build wealth with cash flow rentals.
You can find positive cash flow properties for sale using Mashvisor. To learn more about our tools, click here.
23- Beware of Local Rental Regulations
As a landlord, you have to be familiar with fair housing laws as well as specific local landlord-tenant laws in the market where you’re buying rental property. This includes laws and regulations for the process of registering your property, tenant security deposits, rules around eviction, rent control, etc. Landlords can end up paying expensive fees if they violate such regulations. Don’t let this happen to you. Research local laws thoroughly beforehand in order to avoid running afoul of them.
24- Buy a Vacation Rental Property
With the rise of short-term rental sites like Airbnb, investing in vacation rentals is becoming an optimal strategy for beginner real estate investors. In some locations, you can make a lot of money from buying a second home and renting it out on a nightly basis to short-term guests. The reason why many investors believe that buying a vacation rental property is the best rental strategy is the fact that it can make a higher return on investment than a traditional rental. If you’re interested in buying a vacation rental to rent out on Airbnb, make sure to read our Ultimate Guide to Buying an Airbnb Property with Ease.
25- Beware of Short-Term Rental Regulations
An important thing to know before you buy a vacation rental property is that many cities across the nation have put into place short-term rental restrictions. Some of them ban non-owner occupied Airbnb rentals – meaning, the property has to be your primary residence if you plan to list it as a short-term rental. There are also zoning laws and permit requirements to be aware of. Understand these laws before buying your first rental property to ensure it can be used as a vacation rental without getting you into legal trouble.
26- Find a Solid Real Estate Agent
Just like when searching for your own home, you’ll want to work with an agent when searching for an investment property for sale. Most experts recommend finding an investor-friendly real estate agent. Meaning, you want to work with someone who has experience working with rental properties instead of one who simply works in residential areas. Tell your agent your plans and purchase criteria and he/she should be able to search for the best listings, keep you focused on your goals, and walk you through the process of buying rental property. Find a hot real estate agent in your area here!
27- Speak with Rental Property Managers
Hiring the services of rental property managers can be a good thing to consider for a first-time real estate investor. Ask yourself: Do I have the time to manage my investment? If the answer is no, then a property manager is needed. Managers will do pretty much all the work from interviewing and doing background checks on tenants, making sure they sign the lease and pay their rent on time, setting the rental rate, taking maintenance calls, etc. If you opt against hiring one, it’s still a good idea to speak with a manager for advice and tips for managing a rental property on your own.
28- Choose the Right Rental Property
Buying a rental property is different than a primary residence. You might like a house in the countryside, but a tenant might prioritize being close to jobs and schools. So, when you’re searching for rental properties for sale, you need to focus on finding the right one that would appeal to your target tenant. At the end of the day, it’s the tenant who’ll be living in this property. Therefore, make sure to identify the tenant group you’re targeting (students, young professionals, families, retirees, or vacationers) and invest in income properties with features that hold the greatest appeal for them.
29- Do Pro Forma Analysis
When buying rental property, the seller or real estate broker will provide you with a pro forma document. A property’s pro forma is essentially its cash flow projections. These projections help real estate investors determine the investment’s potential monthly rental income, expenses (including taxes), and the expected return on investment. However, sometimes sellers exaggerate these numbers to mislead buyers. Hence, you should do a pro forma analysis on the property you’re looking to buy before placing your offer.
30- Get the Numbers Right
One of the most important buying rental property tips for beginners is to recognize that a good deal lies behind the numbers. There are two main reasons why first-time real estate investors lose money: they either fall in love with a property that doesn’t make financial sense, or they miscalculate costs and values. So, learn how to accurately calculate cash flow and ROI metrics like cap rate and cash on cash return prior to making an investment decision. Better yet, buy a Rental Property Calculator and let it run the numbers for you using accurate real estate data and predictive analytics.
31- Look at Real Estate Comps
Rental comps is a term used in real estate investing that refers to comparable rental listings. Investors use comps to determine the current value of a rental property in comparison to other similar ones in the real estate market. Analyzing comps will also give you a benchmark of rental prices, a feel for demand, and a better understanding of the average performance and profitability of the housing market itself. All of this is important to know before buying rental property. Experts recommend finding at least 3-5 real estate comps that were sold within the past 3-6 months within a radius of 1-3 miles from your subject investment property.
32- Have a Property Inspection Performed
Never buy your first rental property before consulting with a professional home inspector. An inspection will reveal any hidden problems in the property that you didn’t catch and which could cost you thousands of dollars to repair – turning the property into a money pit instead of an income-producing asset. You can use the results of a home inspection in negotiations to either reduce the price or ask the seller to fix these issues before buying the property.
33- Negotiate with the Seller
Speaking of negotiations, don’t be afraid to do it! Sellers actually expect buyers to negotiate. If you don’t, they start second-guessing their pricing and wondering if they should have asked for more. If you’re not good at negotiations, your real estate agent will take on this task to bring you the best possible price. Another tip for buying rental property is that if the seller won’t accept a lower price after negotiating back and forth, you can walk away and search for another real estate deal.
34- Remember Homeowners Insurance
Accidents come in all shapes and sizes. So don’t place unnecessary risk on your real estate investment by failing to obtain homeowners insurance. Call around and speak with a few local agents to compare prices, packages, and of course, coverage. First-time landlords should also carry an umbrella insurance policy. This type of policy offers a secondary layer of protection in the event of an unexpected accident or an unforeseeable lawsuit such as an unhappy tenant who was recently evicted.
35- Have a Marketing Strategy
If you’re planning to buy a rental property that’s currently vacant, then it’s important that you find quality tenants as quickly as possible. The longer a rental stays vacant, the more rental income you lose which can quickly eat into your annual cash flow. Hence, before buying your first rental property, make sure you plan how to market it and find tenants. The best places to advertise your rental property are major online real estate marketplaces. For more ideas, check out these 6 Tips to Help You with Marketing Your Property for Rent.
36- Get to Know Your Inherited Tenants
Sometimes, you might find an income property for sale that already has tenants. Turnkey real estate properties are one example of such properties. If you are buying rental property with tenants, a good tip from experts is to ensure they are trustworthy tenants. The best thing to do is simply ask the previous owner for their background checks, credit checks, rental applications as well as the tenant’s rental payment history.
37- Consider a Real Estate Partnership
Making a successful real estate investment alone can be a daunting task, especially if you’re still new or don’t have enough capital. That’s why you might want to consider working with a partner on your first rental property. A partnership can help you accomplish more than you could on your own. Moreover, it’ll give you the chance to pool skill sets, resources, and experience to complete a real estate project. This allows you to spread risk, scale your business, take on larger projects, and buy more rental properties.
38- Network with Real Estate Professionals
If you want to be a successful real estate investor, then you should surround yourself with professionals in the industry. Investing in real estate rentals is a skill learned largely by experience, and the experience of other investors is a much easier (and cheaper) path than learning from your own mistakes. Networking with professionals like real estate agents, attorneys, managers, inspectors, and even handymen is also a great way to get advice on what to do and what to avoid. So, another great tip for new landlords is to join a local landlord association and create a real estate investment network that you can rely on.
39- Focus on Return on Investment
After buying rental property, your #1 goal should always be getting a good rate of return on investment. For example, if you want to renovate your property, make sure you calculate the costs of home improvements and see how this will influence your ROI beforehand. Will it increase the property’s value and allow you to charge higher rent or sell it later for good profits? If not, you need to think twice before moving forward with real estate renovations. Don’t invest money on something that won’t give you a good return. For example, minor kitchen remodeling and manufactured stone veneers offer better ROI than, say, bathroom or master suite additions.
40- Plan an Exit Strategy
Unexpected emergencies can affect anyone, including landlords and real estate investors. You can find yourself in desperate need of cash. In this case, you need to have a plan of action to get the money as fast as you can. Hence, our last tip for buying rental property is to have an exit strategy in mind before getting started with real estate investing. An exit strategy allows investors to cash out of an investment property with minimum difficulty. The best exit strategies recommended by experts are selling to a homeowner, selling to another investor, and refinancing.
There you have it – 40 expert tips and things to consider before buying your first rental property. Use these tips to your advantage to avoid costly mistakes and make investing in income properties a bit easier. Good luck!